A guide to different kinds of Mutual Funds

 
Here is how Mutual Funds work: They pool together money from several investors, who may range from individual investors to companies and other financial institutions. A fund manager then invests this capital on behalf of the investors in an array of investment vehicles, such as equity, stocks, bonds, debentures and other money market instruments in order to generate profitable returns. These returns are proportionately distributed among the fund's shareholders. 
 
While this is easy enough to understand, novice investors often come up against dilemmas when introduced to the different kinds of mutual funds that exist. Every mutual fund is governed by different investment objectives, which determine the securities that it invests in. Moreover, certain mutual funds invest strictly in debt securities whereas others specialise in equity investments. It is important to distinguish between different kinds of mutual funds so that one may further determine which one to invest in. 
 
Mutual funds can be categorised on the basis of :
 
1)    Structure
 
Structurally speaking, there are three types of mutual funds. Of these: 

    • Open ended mutual funds are open for investors throughout the year. They are not governed by fixed maturity periods, and are highly liquid.
       
    • Closed ended funds can be invested in only during a New Fund Offer (NFO) and have a fixed maturity period of 3 to 15 years. 
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    • An interval fund combines elements of both. They remain mostly closed-ended but become open ended periodically.

 

2)    Nature


There are seven types of mutual funds by nature. These include:

    • Equity funds, which invest only in equity securities.
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    • Low risk debt funds, which invest in debt securities to provide investors with a regular income. 
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    • Balance funds are those which invest in both, equity and debt securities. Equity provides long-term growth while debt securities provide income in the short-term. 
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    • Gold funds allow investors to purchase and sell gold bullion without making physical transactions.
       
    • Real estate mutual funds invest strictly in the real estate market, and are subject to fluctuations within the same.
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    • Active funds are those wherein the fund manager selects the investment portfolio.
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    • Unlike active funds, passive funds are those wherein the fund manager does not have the ability of selecting the investment portfolio.

 

3)    Objective of investment


Every investment has, or should have, a clear objective. Keeping the different objectives of investors in mind, there are three types of mutual funds.  

    • Growth funds cater to investors looking for long term growth of capital. They have a minimum holding period of 5-10 years, are not very liquid.
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    • Value funds invest in equity securities that are more likely than others to provide high dividend payments. These cater to investors looking to make short-term profits.
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    • A fund of funds is a specialised mutual fund that invests in other mutual funds.
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With the sheer variety available to mutual fund investors, there is no longer any such thing as the 'best mutual fund'. Rather, every individual investor now has the chance to decide which mutual funds, and combinations thereof, are best suited to their own financial means and desires.

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